Bernanke to clarify stimulus plans

Trader Richard Cohen at the New York Stock Exchange, which is trying to determine what the Fed will do.
Trader Richard Cohen at the New York Stock Exchange, which is trying to determine what the Fed will do. (RICHARD DREW / AP)
Posted: June 19, 2013

WASHINGTON - Is the era of ultralow interest rates nearing an end?

That's the question - and the fear - Chairman Ben Bernanke will face Wednesday when he takes questions after a Federal Reserve policy meeting.

Financial markets have been gyrating in the 31/2 weeks since Bernanke told Congress that the Fed might scale back its effort to keep long-term rates at record lows within "the next few meetings," earlier than many assumed.

Bernanke cautioned that the Fed would slow its support only if it felt confident the job market would show sustained improvement. Earlier that day, he had said the Fed must take care not to reduce its stimulus for the still-subpar economy prematurely.

Yet investors were left puzzled and spooked by a mixed message. Fear spread that the Fed would soon slow its $85 billion-a-month in bond purchases intended to hold down long-term borrowing rates to spur spending. Many worried that a pullback in bond purchases could boost long-term rates, trigger a stock sell-off, and perhaps weaken the economy.

On Wednesday, when the Fed ends a two-day policy meeting with a Bernanke news conference, the financial world will be looking to the chairman to settle the confusion. What, he will likely be asked, would show sustained job-market improvement? And when will the Fed most likely slow the pace of its bond purchases?

Last month, the U.S. economy added a solid 175,000 jobs. But the unemployment rate was 7.6 percent. Economists tend to regard the job market as healthy when unemployment is between 5 percent and 6 percent.

Since Bernanke's vague public comments May 22, the Dow Jones industrial average has fluctuated sharply and shed about 3 percent of its value. But the bigger shock has been in the bond market. The rate on the benchmark 10-year Treasury has jumped from a low of 1.63 percent in early May to 2.13 percent.

Higher rates ripple through the economy by making mortgages and other loans costlier. The average rate on the 30-year fixed mortgage, which tends to track the 10-year Treasury yield, reached 3.98 percent last week, according to Freddie Mac. That's its highest level since April 2012.

Compounding the confusion have been comments from other members of the Fed's policy committee. Minutes of the previous meeting suggest a sharp division: Some, like Bernanke, stress the need to fight high unemployment with low rates; others warn rates kept too low for too long raise the risk of high inflation and financial instability later.

Economists say Bernanke will seek to clarify the Fed's message Wednesday. Some think he could spell out the likely timetable for curtailing bond purchases, perhaps signaling that the Fed is moving toward at least the start of a reduced pace of bond purchases in the second half of the year.

Sung Won Sohn, an economics professor at Martin Smith School of Business at California State University Channel Islands, suggested one possible approach: The Fed could reduce its $85 billion a month in purchases to about $60 billion in September, then to about $35 billion early next year, then stop the purchases by spring.

comments powered by Disqus